US dollar continued to strengthen during Wednesday’s trading session, supported by stronger than expected inflation data and hawkish remarks from Federal Reserve officials. These developments pushed the American currency closer to its highest levels of the year, putting pressure on the euro and British pound. The US Dollar Index climbed to 102.3 points after gaining 0.6% in the previous session, while the euro declined to $1.1142 and sterling weakened to $1.3319.
The gains followed the release of October’s US Consumer Price Index, which showed a monthly inflation increase of 0.4%, exceeding market expectations of 0.3%. Core inflation also rose by 0.3% during the month, above forecasts of 0.2%. These figures heightened concerns about persistent inflationary pressures, prompting investors to increase their expectations that the Federal Reserve will continue tightening monetary policy in the coming months.
Hawkish comments from Federal Reserve officials further reinforced these expectations. Christopher Waller expressed his willingness to support a 25 basis point interest rate increase in December, with the possibility of backing a larger 50 basis point hike if inflationary pressures persist. Dallas Fed President Lorie Logan also emphasized the need for two additional rate increases to bring inflation under control. According to the CME FedWatch tool, the probability of a 25 basis point increase in December rose to approximately 91%, compared with 84% on Monday, while the likelihood of a 50 basis point hike reached around 10%.
The impact of US inflation data extended to global government bond markets, where selling pressure pushed yields higher across the United States, Europe, and Asia as investors reassessed the interest rate outlook. The yield on the US 10 year Treasury climbed to 5.01% during Asian trading, recording its largest daily increase since September. ING also reported that shorter maturity Treasury yields rose by approximately 20 basis points, while the spread between 2 year and 10 year Treasury yields narrowed by 7 basis points.
In Europe, the yield on Germany’s 10 year government bonds stabilized at 3.3%, while the 2 year yield stood at 3.1%, following sharp increases triggered by the US inflation report. Meanwhile, Japan’s 10 year government bond yield held near 2.8% after recording its largest daily increase since March, reflecting the growing influence of rising US borrowing costs on international bond markets.
Michiel Tukker, Senior Rates Strategist at ING, believes that a sustained monthly core inflation rate of 0.3% implies an annual inflation rate above 3%, supporting his expectations that US 10 year Treasury yields will remain near 5%. Despite growing expectations of a December rate increase, the bank anticipates a 25 basis point hike, followed by no additional increases throughout 2027.
British pound weakened against the dollar despite continued expectations of tighter monetary policy in the United Kingdom. The Bank of England recently raised interest rates from 3.75% to 4%, with eight policymakers supporting the decision and one voting against it. Deputy Governor Clare Lombardelli warned that the risks of persistent inflation over the medium term were becoming increasingly evident. She noted that decisions regarding potential rate increases in December or February would depend on upcoming economic data, leaving both meetings open for further policy action.
In the eurozone, ING expects the European Central Bank to raise interest rates to 2.75% at its December 17 meeting, potentially coinciding with another increase by the Federal Reserve. However, the bank sees a weaker case for an extended monetary tightening cycle in Europe compared with the United States. This divergence could maintain downward pressure on the euro in the coming weeks, particularly if US Treasury yields remain elevated.
Chris Turner, Global Head of Markets at ING, explained that a flattening US Treasury yield curve, as interest rates move further into restrictive territory, typically strengthens the dollar against currencies closely linked to economic growth. The bank expects the US currency to maintain its strength over the coming weeks, potentially approaching the upper boundaries of its current trading ranges.
Investors are now turning their attention to the October US Producer Price Index report, scheduled for release on Friday. The data will provide further insight into the persistence of inflationary pressures and whether the Federal Reserve may need to continue raising interest rates. Markets are also monitoring upcoming remarks from European Central Bank officials, including Christine Lagarde, alongside developments in UK monetary policy and the possibility of additional rate increases at forthcoming meetings.
Further evidence of persistent inflation could strengthen expectations of continued US monetary tightening, providing additional support for the dollar and Treasury yields while placing pressure on the euro, British pound, equities, and gold. Conversely, signs of easing price pressures could reduce expectations of further interest rate increases, potentially limiting the dollar’s gains and supporting a recovery in major currencies over the coming weeks.
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